Wealth managers offer advice for clients on 'SALT torpedo'

Beware the SALT torpedo.

A substantial and surprising surge in the marginal tax rate for select high-income earners due to the phaseout of the state and local tax (SALT) deduction is now being referred to by wealth managers and tax professionals as the 'SALT torpedo.' The SALT torpedo is linked with temporary changes enacted for the 2025 tax year under President Donald Trump's "One Big Beautiful Bill Act” aka the OBBBA.

And it has financial advisors working overtime to make sure it does not strike their clients.

Advisors say a common mistake is assuming that strategies like prepaying property taxes, which is part of SALT, will always reduce a client's tax bill. However, once income enters the $500k to $600k range, the SALT deduction begins to phase out so quickly that those prepayments can yield no net benefit.

Joshua Shoshan, senior vice president at Wealthspire Advisors, points out that problems tend to arrive when clients overlook how an unexpected income event like a large bonus, stock option exercise, or capital gains can put them in the “torpedo zone” and erase the deduction they were counting on.

“Some income events, like the exercise of stock options or taking capital gains, can be postponed to the following tax year. Modeling income in detail might lead to postponing certain income events, preserving the SALT deductions because an income threshold can avoid being breached,” Shoshan said.

Keith Fenstad, director of wealth planning at Tanglewood Total Wealth Management, said inadequate planning around the impact of required minimum distributions (RMDs) from IRAs is a common client occurrence. Both the RMDs on their own IRAs upon turning 73, and for many, being subject to the 10-year rule on Inherited IRAs from a deceased parent.

He also notes that other commonly overlooked torpedo triggering items are the cumulative effect of realizing capital gains throughout the year with no eye toward harvesting losses as well, and not paying attention to year-end capital gain distributions from funds owned in taxable brokerage accounts.

Fenstad adds that clients and their advisors also need to be smart about their charitable giving.

“Using Qualified Charitable Distributions (QCDs) from IRAs potentially becomes critical in avoiding the SALT torpedo, especially for those in RMD age. QCDs can also be leveraged to enhance other new deductions, such as the senior bonus deduction,” Fenstad said.

Timing that Roth conversion
 

The timing of a Roth conversion or a home sale make the difference between keeping and losing the deduction. That’s why Dean Deutz, wealth strategist at RBC Wealth Management U.S., believes it’s important to be strategic with the timing of Roth conversions.

“It is best to do Roth IRA conversions in years where taxable income is low,” Deutz said. 

Along similar lines, Fenstad suggested the possibility of bunching SALT deductions opposite of years doing Roth conversions or capital gain realization.

“Planning is essential to look at a client’s lifetime tax exposure. Given the particular circumstances, a one-time or short-term exposure now may be worth the price to insulate or defer facing it again later,” Fenstad said.

If a conversion or home sale pushes income above the critical range in the same tax year, the taxpayer can lose thousands of dollars in deductions. On the other hand, spreading these events across multiple years or deferring one until a lower-income year might preserve the deduction entirely.

“Careful sequencing is essential, since the same transaction in December versus January can yield dramatically different tax outcomes,” Shoshan said.

Soften the torpedo blow

When clients do trigger the phaseout, advisors there are some strategies that can soften the impact of the higher tax bill.

Fenstad, for example, says clients should consider QCDs from IRAs for charitable giving up to the max allowed. 

“For that level of gifting, it is more beneficial than gifting appreciated property,” Fenstad said. “Also, potentially increased participation in an employer’s Deferred Compensation plan. Deferring salary and/or bonus can be beneficial to steer clear.”

Similarly, Deutz said clients can work to lower their Modified Adjusted Gross Income (MAGI) by deferring income from the current year by using 401(k) or IRA contributions if eligible and possible. He points out that IRA Qualified QCDs do not affect MAGI and can be a tax-efficient way to make gifts to charity.

Finally, Shoshan said business owners might consider entity-level state tax payments through pass-through entity tax regimes, which bypass the SALT cap entirely.

“Most importantly, forward-looking cash flow planning helps manage liquidity so the unexpected tax hit does not impact other financial goals,” Shoshan said.